Management Is Doing Its Part

After a lead drug at a biotech fails -- be it a clinical trial or a Food and Drug Administration rejection -- a cost-cutting effort is almost guaranteed to follow. Arena Pharmaceuticals (NAS: ARNA) cut staff after lorcaserin was rejected on its first attempt. Ditto for MannKind (NAS: MNKD) after its second FDA rejection. Getting to the finish line is most important.

So when Chelsea Therapeutics' (NAS: CHTP) Northera got rejected and it became clear that a return trip in front of the FDA firing squad wasn't going to be quick, management had to do everything possible to reduce its cash burn. The company ended the first quarter with less than $52 million.

Interestingly, "everything possible" includes management taking a 25% pay cut. That, Fools, is not something you see every day.

Many biotech management teams appear to be more interested in lining their pockets with funds raised through secondary offerings than making sure drugs get approved. Cell Therapeutics (NAS: CTIC) , for instance, has burned through $1.5 billion of investors' capital but doesn't have a drug approved in the U.S. yet; Pixuvri is approved in Europe, but the prospects aren't outstanding.

That isn't to say Chelsea's management took one for the team and left everyone else safe. About 35% of the rest of Chelsea's employees are going to move to part-time status. Performance bonuses have also been halted until Northera is approved.

Again, getting to the finish line is most important. The cost-cutting measures, which also include transitioning patients from a safety study to an alternate-access program, will save the biotech $6 million at a time when every dollar counts.

While management's decisions should be applauded, it doesn't appear that it will be enough to get the company through to its next FDA decision in the third quarter of 2013. With just $18 million to $20 million expected in the bank at year-end, the biotech will likely have to raise funds before the next FDA decision. Hopefully, the confirmatory trial will come out positive, shares will rise, and the secondary offering to raise funds won't be all that dilutive to shareholders.

Hopefully.

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